Airport Commission : concession audit of Guava & Java (SFO) Inc.

SAN FRANCISCO PUBLIC LIBRARY

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San Francisco Public Library

Government Information Center
San Francisco Public Library
tOO Larkir, Street. 5th Floor
San Francisco, CA 94102

REFERENCE BOOK

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AIRPORT COMMISSION

Concession Audit of
Guava & Java (SFO) Inc.

GOVERNMENT
DOCUMENTS DEPT

AUG 3 1 Z009 August 27, 2009

SAN FRANCISCO
PUBLIC LIBRARY

AIRPORT COMMISSION:

Concession Audit of
Guava & Java (SFO) Inc.

GOVERNMENT
DOCUMENTS DEPT

AUG 3 1 Z009 August 27, 2009

SAN FRANCISCO
PUBLIC LIBRARY

CONTROLLER'S OFFICE
CITY SERVICES AUDITOR

The City Services Auditor was created within the Controller's Office through an amendment to the
City Charter that was approved by voters in November 2003. Under Appendix F to the City Charter,
the City Services Auditor has broad authority for:

• Reporting on the level and effectiveness of San Francisco's public services and
benchmarking the city to other public agencies and jurisdictions.

• Conducting financial and performance audits of city departments, contractors, and functions
to assess efficiency and effectiveness of processes and services.

• Operating a whistleblower hotline and website and investigating reports of waste, fraud, and
abuse of city resources.

• Ensuring the financial integrity and improving the overall performance and efficiency of city
government.

The audits unit conducts financial audits, attestation engagements, and performance audits. Financial
audits address the financial integrity of both city departments and contractors and provide reasonable
assurance about whether financial statements are presented fairly in all material aspects in
conformity with generally accepted accounting principles. Attestation engagements examine, review,
or perform procedures on a broad range of subjects such as internal controls; compliance with
requirements of specified laws, regulations, rules, contracts, or grants; and the reliability of
performance measures. Performance audits focus primarily on assessment of city services and
processes, providing recommendations to improve department operations.

We conduct the audits in accordance with the Government Auditing Standards published by the U.S.
Government Accountability Office (GAO). These standards require:

• Independence of audit staff and the audit organization.

• Objectivity of the auditors performing the work.

• Competent staff, including continuing professional education.

• Quality control procedures to provide reasonable assurance of compliance with the auditing
standards.

Audit Team: Elisa Sullivan, Audit Manager

Annie Cheng, Associate Auditor

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OFFICE OF THE CONTROLLER

CITY AND COUNTY OF SAN FRANCISCO

Ben Rosenfield
Controller

Monique Zmuda

Deputy Controller

August 27, 2009

San Francisco Airport Commission

P.O. Box 8097

San Francisco, CA 94128

President and Members:

The Controller's Office, City Services Auditor, presents its report concerning the concession
audit of Guava & Java (SFO) Inc. (Guava & Java). Guava & Java has a 10-year lease
agreement with the Airport Commission (Airport) of the City and County of San Francisco to
operate two facilities in the domestic terminals of San Francisco International Airport (SFO).

Reporting Period: January 1 , 2006, through December 31 , 2008

Rent Paid: $1,160,584

Guava & Java overpaid rent by $5,105 because it overstated reported revenues of $12,534,793
by $20,000 and paid a rent adjustment invoice which included errors. Further, Guava & Java
underpaid the food court maintenance fee by $304 and was late in complying with a lease
requirement to maintain its deposit due to an Airport error. As a net result of these errors, the
Airport should refund Guava & Java a total of $4,801 .

The responses from the Airport and Guava & Java are attached to this report. The Controller's
Office, City Services Auditor, will follow-up with the Airport on the status of the
recommendations made in this report.

Respectfully submitted,

Robert Tarsia
Deputy Audit Director

cc: Mayor

Board of Supervisors
Civil Grand Jury
Budget Analyst
Public Library

Results:

415-554-7500

City Hall • 1 Dr. Carlton B. Goodlett Place • Room 316 • San Francisco CA 94102-4694

FAX 415-554-7466

Page intentionally left blank.

INTRODUCTION

Audit Authority The Office of the Controller (Controller) has authority under

the San Francisco Administrative Code, Chapter 10, Article
1, Section 10.6-2 to audit, at regular intervals, all leases of
city-owned real property where rent of $100,000 or more a
year is to be paid to the City and County of San Francisco
(City). In addition, the City Charter provides the Controller,
City Services Auditor (CSA), with broad authority to conduct
audits. The audit team conducted this audit under that
authority and pursuant to an audit plan agreed to by the
Controller and the Airport Department (Airport).

Background Guava & Java (SFO) Inc. (Guava & Java) operates two

facilities under a 10-year lease agreement (Lease No. 03-
0191) with the Airport Commission (Commission) of the
City. Guava & Java operates one facility, with a rent
commencement date of September 1 , 2004, at Domestic
Terminal 1 and another facility, with a rent commencement
date of March 15, 2005, at Domestic Terminal 3 of San
Francisco International Airport (SFO). The lease agreement
expires on March 14, 2015.

The lease agreement requires Guava & Java to pay the
Airport the greater of a minimum annual guarantee (MAG),
or a tiered percentage rent of 6 to 10 percent of its annual
gross revenues. The Airport can adjust the MAG annually.

Scope and Methodology The purpose of this audit was to determine whether Guava

& Java complied with the reporting, payment, and other
provisions of its lease agreement. The audit covered the
period from January 1 , 2006, through December 31 , 2008.

To conduct the audit, the audit team:

• Examined the applicable terms of Guava & Java's lease
and the adequacy of its procedures for collecting,
recording, summarizing, and reporting its gross
revenues to the Airport.

• Tested on a sample basis Guava & Java's monthly
sales records, daily sales reports, and bank deposit
records to determine whether Guava & Java accurately
reported its gross revenues to the Airport.

• Verified whether Guava & Java had any outstanding

1

payments due to the Airport for the audit period.

• Compared the gross revenues reported to the Airport
with the gross revenues reported to the California State
Board of Equalization for selected sample calendar
quarters during each year.

• Verified Guava & Java's compliance with certain other
provisions of its lease.

This performance audit was conducted in accordance with
generally accepted government auditing standards. Those
standards require planning and performing the audit to
obtain sufficient, appropriate evidence to provide a
reasonable basis for findings and conclusions based on the
audit objectives. The audit team believes that the evidence
obtained provides a reasonable basis for the findings and
conclusions based on the audit objectives.

AUDIT RESULTS

From January 1, 2006, through December 31, 2008, Guava
& Java reported gross revenues of $12,534,793 and paid
$1,160,584 in rent to the Airport. However, the audit
revealed that the reported revenues for 2008 were
overstated by $20,000. Further, the Airport issued an
erroneous percentage rent adjustment invoice in 2007.
Both errors resulted in Guava & Java overpaying a total of
$5,105. The exhibit below summarizes Guava & Java's
reported gross revenues and rent paid.

1 Gross Revenues Reported and Rent Paid

1 January 1, 2006, Through December 31, 2008

A

B

C

D

Reporting Period

Reported/Paid

Audited

Over/(Under)
Reported/Paid
[B-C]

Gross Revenues Reported

January 1 , 2006 - December 31 , 2006

$ 3,709,112

$

3,709,112

$ 0

January 1 , 2007 - December 31 , 2007

4,349,529

4,349,529

0

January 1 , 2008 - December 31 , 2008

4,476.152

4,456,152

20,000

Total Gross Revenues

$ 12,534,793

$ 12,514,793

$ 20,000

Rent Paid

January 1 , 2006 - December 31 , 2006

$ 338,911

$

338,911

$ 0

January 1 , 2007 - December 31 , 2007

406,058

402,953

3,105

January 1 , 2008 - December 31 , 2008

415.615

413,615

2,000

Total Rent Paid

$ 1,160,584

$

1,155,479

$ 5,105

Source: Guava & Java's Monthly Statements of Sales and Rent Due and supporting documents.

Guava & Java Overstated
Its Revenues and
Overpaid its Rent

Guava & Java and the
Airport Made Errors
Affecting Rent Paid

Guava & Java overpaid rent by $5,105 during the audit
period. This occurred because it inadvertently overstated
gross revenues by $20,000 on the June 2008 Monthly
Statement of Sales and Rent Due submitted to the Airport.
As a result, Guava & Java overpaid rent by $2,000. In
addition, the Airport issued to Guava & Java a percentage
rent adjustment invoice dated May 15, 2008, which
misstated the May 2007 total sales and August 2007 total
payment. For this reason, the Airport overcharged, and
Guava & Java overpaid, rent of $3,105.

Guava & Java Underpaid
Its Food Court
Maintenance Fee

Guava & Java underpaid the food court maintenance fee by
$304 because of an Airport error. Domestic Terminal Food
Court Maintenance Agreement Amendment No.1 stipulates
that the monthly food court maintenance fee to be paid to

3

the Airport is $3,048. However, Airport Accounting issued
an erroneous billing instruction to Guava & Java charging a
monthly fee of $3,029. As a result, Guava & Java underpaid
the food court maintenance fee for 16 months, between
March 2007 and June 2008.

The Airport Did Not
Timely Advise Guava &
Java of Its Security
Deposit Increase for 2008

Under lease agreement section 13.2, Guava & Java is
required to increase its deposit so that at all times the
deposit is equal to half of the then-current MAG. According
to Airport property management, the Airport advises its
tenants of the increased amount at the beginning of each
year. However, the Airport did not advise Guava & Java to
increase its deposit by $862 on its MAG adjustment date,
which was January 1 , 2008, until the end of calendar year
2008.

Recommendations The Airport should take the following actions:

1 . Reimburse $4,801 to Guava & Java in overpaid rent
and fees for the audit period.

2. Remind Guava & Java on a timely basis that the lease
agreement requires that the security deposit be
increased to one-half of the current MAG on the MAG
adjustment date.

4

ATTACHMENT A: AIRPORT'S RESPONSE

San Franosco International Airport

July 13, 2009

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Robert Tarsia, Deputy Audit Director
City Mali, Room 476
1 Dr. Carlton B. Gocxllett Place
San Francisco. CA 94102

Reference: Guava and Java Restaurants in the Domestic Terminals Lease
No. L03-019I between the City and County of San Francisco,
through its Airport Commission, and Guava and Java.

Dear Mr. Tarsia:

The San Francisco International Airport ("Airport") is in receipt of the Audit Recommendation
from City Services Auditor Division for its audit of the Guava and Java Restaurant's in the
Domestic Terminals Lease No. 03-0191 between the City and County of San Francisco, through
its Airport Commission, and Guava and Java ("Tenant"). The following is the Airport's
response to the Audit Report findings:

1. Reimburse $4,801.00 to Guava & Java in overpaid rent and fees for the audit
period. The Airport agrees with this statement.

2. Remind Guava & Java that the lease agreement requires that the security deposit
be increased to one-half of the current MAG on the MAG adjustment date. The

Airport agrees, and will inform the tenant in writing on an annual basis of their need to
comply with Lease requirements regarding deposits.

Thank you for your staff s work on this audit. Please do not hesitate to call if you have any
questions.

Cheryl Nashir

Associate Deputy Airport Director
Revenue Development and Management

cc: Wallace Tang

Matthew McCormiek
Annie Cheng

Sincerely,

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ATTACHMENT B: GUAVA & JAVA'S RESPONSE

August 24, 2009

TO: Robert Tarsia, Deputy Audit Director
City Hall, Room 476 '
1 Dr. Carlton B. Goodlett Place
San Francisco, CA. 94102

FR: Rita Bhasker
David Sterling

RH: San Francisco (SFO)

Audit Acceptance and Agreement

MEMO

Attn. Annie Cheng for Robert Tarsia

Please accept shis memo as acceptance and agreement with the audil report.
We are satisfied with the report. Thank you.

Guava & Java SFO, Inc.
1040 Walker Mill Road
Great Fails, Virginia 22066
703/501-4800

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